BLOCL

The New Robber Barons

By Janet M. Tavakoli

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This book is a compilation of selected articles written after September 2008 and ending in 2012, a few months after the implosion of MF Global.  It’s a selective chronicle of how the New Robber Barons prospered—and continue to prosper—at the expense of those without government connections.

Every year since the financial crisis, government has become less representative of its electorate.  Government has become a service industry to its money raising cronies.

The largest Ponzi scheme in the history of the capital markets is the relationship between failed mortgage lenders and investment banks that securitized the risky overpriced loans and sold these packages to other investors—a Ponzi scheme by every definition applied to Madoff. These and other related deeds led to the largest global credit meltdown in the history of the world.

The real problem is there were too many outright liars hiding behind the curtain of structured finance.

If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and ordered you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest. How is it, then, that you have remained largely silent in the face of the same sort of behaviour by Wall Street and Washington?

President Obama has not yet condemned Wall Street's massive fraud, and Congress's bailout methods rewarded Wall Street's malicious mischief. The House just passed a bigger bailout bill that will give too-big-to-fail Wall Street banks access to $4 trillion dollars the next time they crash the economy.

The money cartel is as dangerous as the Mexican drug cartel. Its weapons of choice are taxpayer subsidized funds for swarms of Washington lobbyists, "money jobs" for politically connected yes men, and lucrative positions for former regulators and the law firms that hire them. Wall Street is winning the class war, and taxpayers supplied the arms. Wall Street's PR spin, lobbying, money train to Congress, and bullying of fact finders have kept much of the truth away from the public. Frank Rich of The New York Times pointed out: "What we don't know will hurt us, and quite possibly on a more devastating scale than any [Al] Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin."

The largest Ponzi scheme in the history of the capital markets is the relationship between failed mortgage lenders and investment banks that securitized the risky overpriced loans and sold these packages to other investors—a Ponzi scheme by every definition applied to Madoff. These and other related deeds led to the largest global credit meltdown in the history of the world.

We have the solutions. We need the will to implement them.

The general financial meltdown experienced in September 2008 was accompanied by the suppression of facts and self-serving misinformation by many of the key players.  Capital buffers and hedges were insufficient, and the controversial choice was made to recapitalize the banks without inquiry into the causes and culprits.  Unfortunately, the bailout was also done without conditions and no meaningful steps have been taken that will prevent a similar global financial catastrophe.

The rating agencies’ problems run deep.  In late 2003, the Financial Times took rating agencies to task for misrating debt issued by scandal-ridden Parmalat, Enron and WorldCom.

By this time, the rating agencies had morphed into a cartel of sorts.  They competed for market share and raced each other’s “standards" to the bottom. 

When rating agencies make mistakes in securitizations backed by debt, the losses tend to be permanent and unfixable. The sole source of income is the portfolio of assets. When they repeatedly fail to understand the risk of the underlying assets—as they have done over several years for a variety of securitizations—they blow the entire job.

The Commercial Financial Services’ (CFS) debacle provides a stunning early example of the rating agencies’ incompetence. 

All three rating agencies gave investment grade ratings to securitizations that merited a junk rating.

The financial implosion of 2008 was not a “black swan” event or an unforeseeable problem.

The banks that ran the alternative banking system played a starring role while the rating agencies played a key, supporting role.

In other words, either through intention or incompetence the rating agencies lied in the sense * that they made false statements that had grave consequences for investors and the global financial markets.

Rating agencies have not been held accountable for past poor performance.  The possibility of malfeasance or collusion with fraud has been skirted rather than addressed.

Until there is an objective reproducible and reliable method of providing credit ratings to securitizations, it will be impossible to rehabilitate the alternative banking system.

Just because the problem of creating a viable global credit rating system is difficult doesn’t mean it shouldn’t be done.  In fact, it is precisely because it is difficult that there is a great need to thoroughly address the issue.

While fraud wasn't the only issue, it was and is a significant contributor to the credit bubble.

We can expect more of the same if we continue to let banks off with a slap on the wrist for malfeasance--along with a taxpayer subsidized fine--while banks neither admit nor deny wrongdoing. *

We bailed out banks that were the key architects of much of our national misery and currency destruction. Those living in poverty will have a much more difficult time bettering themselves, as much of the middle class sinks.

Both the United States and the United Kingdom have had a coordinated non-response to financial reform. If a drunk driver killed your neighbors and crashed the car into your house, you wouldn't expect a police officer to hand the offender a bottle of whiskey and the keys to a bigger, faster, and more powerful car. You would be outraged if the officer said he would only impose a fine, and then made you lend the drunk the money to pay the fine. Yet this is the modus operandi of our financial system, and now financial drunk drivers refuse blood tests and huff that their seat belts were fastened.

Taxpayers are paid only peanuts in fees for these massive subsidies while being squeezed with high interest rates and mortgage foreclosures--after our economy was devastated chiefly by several banks' malicious mischief.

Wall Street banks bet against our entire society when they created and sold phony securities that fueled fraudulent mortgage lending. That activity was profitable for some firms (Goldman) and unprofitable for others (Lehman, Citigroup, Merrill Lynch, and more). Yet in every case, it was control fraud. CEOs and bankers grew rich while the financial institutions that employed them often imploded. The agents of the fraud prospered while American society and the American economy were massively damaged.

We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other.

Until we have real global financial reform and restrain the banks, we won't have sustained growth.

Unrepentant banks resist reform and dilute attempts at regulation while soaking up ongoing subsidies. All of this is dead-end financing at the expense of citizens that saved their money and pay taxes.

Everything we want or need in life comes to us through our relationships with other people.  The quality of our relationships, or human wealth, defines the quality of our lives.